Econ 3-21-2011 - Demand Curve for Monopolist: MR (marginal...

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Econ 3-21-2011 14:21 Why market power matters The ability to affect price, one can reduce quantity to push price up relative to  perfect competition. With only one firm, the price can be driven up Increasing returns to scale A firm that faces defining LRATC Implication: a larger firm faces lower costs. Such a monopoly is called a Natural Monopoly Network Externalities EX: there ins an advantage to standardizing on VHS tapes/beta or blu-ray  dvd/hd dvds’s or a particular operating system o Note: the superior technology may not be chosen, but once a standard is,  its difficult to change. Government-Created Barriers Patent/copyright law EX: patent protects name brand drugs, despite it being possible for other  companies to copy Justification: incentive to innovate when fixed costs are high
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Unformatted text preview: Demand Curve for Monopolist: MR (marginal revenue) < Price Assumption: a monopolist can charge one price to everyone A firm gets a lower P on the next unit sold, but also a lower P on every previous unit solda monopolist moves down demand curve Profit maximizing monopolist THE BASIC MARGINAL CONDITOIN STILL HOLDS: PRODUCE AS LONG AS MB is greater than or equal to MC. Simple Picture Simplifying assumption o Constant costs o Implies MC=ATC Monopolist decision o Produce as long as MR >= to MC o Result: Produce Qm, and charge Pm for profits General Picture Produce as long as MR >= MC Reduce q to drive up p 14:21 14:21...
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Econ 3-21-2011 - Demand Curve for Monopolist: MR (marginal...

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